Question

Explain in words why a profit-maximizing firm will not choose to produce at a quantity where marginal cost exceeds marginal revenue.

Short answer

When the marginal cost exceeds the marginal revenue, the firm's profit begins to fall with the production of one more quantity.

Step-by-step solution

Definition

Marginal Cost is the additional cost incurred to produce one more unit of the output.

Average Variable Cost is the ratio of total variable cost to the quantity produced.

Explanation

A profit-maximizing firm will not choose to produce at a point where marginal cost exceeds marginal revenue, because when the marginal cost exceeds marginal revenue, the firm's profit started to fall with the production of one additional amount of quantity. This is because, at this point cost of producing an additional unit tends to increase, while the revenue generated from production started to fall. And as the objective of the firms is to maximize profit, they choose not to produce any additional output, in order to minimize loss.